Stretching your savings to fit your retirement
Definition of retirement version 1 – a worry-free relaxed stage of your life, when you have the time and money to indulge yourself and tick all those items on your to do list.
Definition of retirement version 2 – constant pressure and tension regarding the balance, or rather imbalance, between your financial needs and wishes, and the actual reality.
Of course everyone would choose version one over version two. The question is – how can you make it happen? And the answer is to begin by taking your head out of the sand.
Your financial reality is created by a combination of external factors over which you have no control, and your personal financial lifestyle which you can control. In Israel, one of the external factors is the current, very low interest rate. It used to be that someone had a portfolio or investments and received a conservative 4%-5% return. If a couple was able to save a million shekelsfor example, earning 40-50,000 nis a year, and supplement that income with a relatively small pension and Bituach Leumi payments (and possibly social security from the old country), they had the ability to retire fairly comfortably.
The problem is that incredibly low interest rates have punished savers who have investments and had counted on savings schemes with no or low risk.
Much as people might resent the low interest rate situation as they feel they are being ‘punished’ unfairly with what should have been a headache-free situation, this is the reality. Your choice is to ignore it and suffer even more, or try and find ways to deal proactively and make the best of a less than ideal situation. Once you acknowledge the situation you will be in a better state of mind to deal with it. Let’s tackle the issue with some very practical advice.
Lower your standard of Living: You need a sustainable standard of living in retirement that matches your income. Lowering your standard of living both before retiring and if necessary after retiring, can help you achieve a balanced long term budget. Expense cutting can be done on a small and large scale. Small scale includes reducing your food shopping bills, ensuring your communications costs are minimized, and keeping travel and entertainment at a reasonable level. Large scale cuts might include downsizing your home and using part of the proceeds to improve your income generating capital. Prioritize what is important to you. If you want to stay in the same area, you could sell your home and move to a smaller place. If you feel the space is still important to you, you may need to consider moving to a different location. The actual price of housing is cheaper in many places in the Israel (eg the periphery) and related costs are often cheaper too.
Change your investment mix: With investments offering very low returns, investors have been forced to consider higher risk investments. Any move along the risk/reward spectrum to higher risk/returning investments must be carefully considered. Anyone who is close to retirement should not put himself in any position where he might jeopardize his life savings. Those who are further from retirement, and can afford the time it may take for investments to recover if the market falls, should consider the option, consult with a professional and then make an informed decision as and if necessary. But don’t jump at a headline promising 15% or 16% with little or no risk. There is no such thing. Higher returns come with higher risk and anyone who presents a high return investment as being low risk should be avoided like the plague.
Although some people like owning an actual property, as we age it becomes harder to be an effective landlord with all the accompanying issues and time-consuming tasks. An alternative for those, and also for those who prefer being one step removed from real estate is a REIT (Real Estate Investment Trust). There are many high quality REITs in the US and a few in Israel that pay good dividends and are an option that should be examined.
Extend or diversify your revenue stream in retirement: Part time jobs can be an excellent source of income. Consider whether your chosen profession fits the bill. Part time jobs after retirement can serve the dual purpose of bringing in income and occupying the sometimes empty structure that retirees find themselves in.
Delay your retirement: Continuing to work in your current job might not be the best option for those itching to quit, but extending your revenue stream (whether part time or full time) beyond your projected retirement age can have a tremendous impact your retirement plan. Not only does it delay you from eating away at your savings, but it also gives your investments time to grow.
Set up automatic savings programs: Savings programs that you don’t need to initiate and think too much about help you avoid the temptation to spend the money on other things. So start the process now while you are still working and you’ll find it can make a major difference in helping you grow your savings.
Hard and annoying as it is, the reality is that your retirement in Israel might not look as comfy as you had imagined. While retirees would love to see interest rates rise, this wishful thinking won’t change the reality.
Sit down, work out your retirement financial plan, and work on finding solutions to stretch your savings so that you too can fund an enjoyable and relaxed retirement.